Facts of the Case

The Revenue Department, through the Principal Commissioner of Income Tax, filed multiple appeals before the Delhi High Court challenging the order passed by the Income Tax Appellate Tribunal (ITAT) concerning the tax liability of Monnet Ispat & Energy Ltd.

During the pendency of these appeals, the National Company Law Tribunal (NCLT), by its order dated 18 July 2017, admitted an insolvency petition under Section 7 of the Insolvency and Bankruptcy Code, 2016, filed by the State Bank of India against the respondent company and declared a moratorium under Section 14 of the Code.

The moratorium prohibited institution or continuation of suits or proceedings against the corporate debtor. Consequently, the issue arose as to whether the income tax appeals pending before the High Court could proceed.

Issues Involved

  1. Whether pending income tax appeals against a corporate debtor can continue after commencement of CIRP under the Insolvency and Bankruptcy Code, 2016?
  2. Whether Section 14 of the IBC bars continuation of proceedings initiated by the Income Tax Department?
  3. Whether the overriding effect of Section 238 of the IBC prevails over tax statutes and appellate proceedings?

Petitioner’s Arguments (Revenue Department)

The Revenue contended that the appeals involved adjudication of tax liability and should not automatically be halted merely because insolvency proceedings had commenced.

It was further argued that unlike certain earlier insolvency laws, the Insolvency and Bankruptcy Code does not provide a mechanism requiring prior permission from NCLT for continuation of proceedings pending before other judicial forums.

The Department sought continuation of the pending appeals despite the moratorium order.

 Respondent’s Arguments (Assessee Company)

The respondent company contended that once CIRP commenced and moratorium under Section 14 was imposed by NCLT, all pending judicial proceedings against the corporate debtor stood prohibited.

It was argued that the language of Section 14 is wide enough to include tax appeals and that Section 238 grants overriding effect to the IBC over all inconsistent laws.

The respondent relied upon the insolvency framework and statutory protection available during the moratorium period.

Court Findings / Observations

The Delhi High Court observed that Section 14(1)(a) of the Insolvency and Bankruptcy Code expressly prohibits the institution or continuation of pending suits or proceedings against the corporate debtor.

The Court further held that Section 238 of the Code clearly provides overriding effect over any inconsistent law for the time being in force.

The Court relied upon the Supreme Court judgment in Innoventive Industries Ltd. v. ICICI Bank, wherein the overriding nature of the IBC was recognized and affirmed.

It was held that the pending appeals by the Income Tax Department squarely fell within the scope of “continuation of pending proceedings” and therefore could not proceed during the subsistence of the moratorium.

Court Order / Final Decision

The Delhi High Court disposed of the income tax appeals and granted liberty to the Revenue Department to revive the appeals subject to further orders of the National Company Law Tribunal (NCLT), after the completion of the corporate insolvency resolution process or upon cessation of the moratorium.

Important Clarification

This judgment clarifies that:

  • Income Tax appellate proceedings are covered within the expression “proceedings” under Section 14 of the IBC.
  • Moratorium under IBC applies even to tax litigation pending before High Courts.
  • Section 238 gives overriding effect to IBC over Income Tax laws in case of inconsistency.
  • Tax authorities may revive proceedings after the moratorium ends, subject to NCLT orders.

Sections Involved

  • Section 7 – Initiation of CIRP by Financial Creditor
  • Section 14 – Moratorium
  • Section 31 – Approval of Resolution Plan
  • Section 33 – Liquidation
  • Section 238 – Overriding Effect of IBC
  • Section 5(1) – Adjudicating Authority

Link to download the order - https://delhihighcourt.nic.in/app/case_number_pdf/2017:DHC:8936-DB/SMD04092017ITA5332017_162641.pdf  

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